How to Calculate Income Tax Expense in a General Entry

by Danny Donahue, Demand Media

Each tax must be deducted from the employee's gross pay.

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Running a business means withholding and filing income taxes with the Internal Revenue Service as well as your state and local tax agencies. Income taxes are deducted from every check that each employee earns. These funds are turned over to the appropriate tax enforcement agency monthly, quarterly or yearly (depending upon the size of your business) to be held until the employee files his tax return in April. Income taxes are deducted from an employee's gross pay. The amount of the tax withheld depends entirely upon the employee's W-4 information and the newest tax liability charts.

Step 1

Review your ledger and find the gross income for each employee on your payroll. For example, an employee who makes $10 per hour, works 40 hours per week and takes two weeks of unpaid vacation each year makes $20,000 per year.

Step 2

Look at the Form W-4 that each employee filled out the day he was hired. Refer to the Tax Table in the IRS Publication entitled Form 1040 Instructions. In your example, you would look through the tables to find that your single employee owes $2,585 in federal taxes.

Find the state income tax debt using each employee's W-4 information. Cross reference that information with the tax tables provided by your state. In this example, the imaginary company is in Virginia. According to the tax calculator on the Virginia Department of Taxation website, your employee owes $893 in state taxes.

Step 4

Locate the local income tax liability for each employee if any is pertinent in your area. In your example, your company is in Virginia and there is no local income tax.

Step 5

Divide the amount of each income tax liability by 50 to find a weekly deduction amount if the employee is not paid for two weeks in the year since there are 52 weeks in a year. In the example, the employee owes $52 per week in federal taxes (rounding up from $51.70) and $18 (rounded up from $17.86) in weekly state taxes.

Step 6

Record these amounts in your general entry ledger as a deduction for each employee. Add all of these amounts together each week and deposit that money into a dedicated savings account reserved for tax money only. Send the money due to the federal, state and local government tax authorities when you file your business returns monthly, quarterly or yearly.

Tip

A 401k or other untaxed retirement fund may alter this procedure. Contact your accountant or tax attorney for any questions with any questions.

Warning

Fraud is a felony. Always be completely honest and accurate in all financial dealings with your employees and government tax authorities. Inaccurate or fraudulent withholding will result in the loss of your business, civil fines or a criminal conviction involving jail time.

About the Author

After learning electronics in the U.S. Navy in the 1980s, Danny Donahue spent a lifetime in the construction industry. He has worked with some of the finest construction talent in the Southeastern United States. Donahue has been a freelance writer since 2008, focusing his efforts on his beloved construction projects.

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